How to prepare for UAE Value Added Tax (VAT) Audit

What is a VAT Audit?

A VAT audit is a thorough review conducted by the FTA to verify the accuracy of the VAT declared, paid, and reclaimed by a business. This process involves scrutinizing records, returns, and other documents to ensure that the business has complied with VAT requirements. The primary goal is to ensure that every tax liability is settled and all due taxes are collected and remitted to the government within the stipulated timeframe.

During a VAT audit, the FTA may request businesses to submit various business documents, which will be compared against the details declared in VAT returns or any other declarations made to the FTA.

When Does the FTA Conduct a VAT Audit?

Initially, the VAT Decree Law provided the FTA with the option to conduct a VAT audit within five years from the end of the relevant tax period. However, effective from January 1, 2023, the introduction of Article 79bis in the UAE VAT Decree-Law allows the FTA to extend this period by an additional four years. The FTA can notify businesses of an audit before the expiration of the initial five-year period.

The FTA can issue a VAT audit notice without any prior reason. This notice, sent at least five days before the scheduled audit date, contains details such as the audit schedule, location, involved parties, and specific reasons for the audit, if any. The audit process begins with a meeting between the auditors and the company at the designated time and place.

VAT Audit Procedures

The FTA can conduct VAT audits in two main ways:

• Remote and Desk-Based Audits: These are initially emphasized where system data and documentation are primarily assessed. If the documentation provided is unsatisfactory, the FTA may proceed to an onsite audit.
• Onsite Audits: Conducted at the business’s premises if further examination is required.

Documents Requested by the FTA

• Businesses are generally given five working days to provide the following documents or information:
• Transaction lists in the format prescribed by the FTA.
• Various reconciliations to match returns with financials, such as revenue reconciliation and VAT ledgers reconciliation.
• Audited or management financial statements.
• Sample documents for each type of transaction, such as customs clearance documents for export of goods.
• Formats of documents like tax invoices and tax credit notes.
• Stock movement and verification reports.
• Any other documents deemed necessary by the tax auditor.

Preparing for a VAT Audit

To ensure smooth audit preparation, taxable persons should keep the following documents ready:

• Tax invoices and documents related to goods and services provided.
• Documents related to the export of goods, such as customs declarations and exit certificates.
• Documents for the import of goods and services, including supplier invoices and customs documents.
• Tax invoices received for goods and services for which VAT input is claimed.
• Received tax credit notes and alternative documents.
• A compiled transaction list of goods and services received and provided in the format suggested by the FTA.
• Tax period-wise reconciliation of revenue and VAT ledgers.

Additional Precautions

To further prepare for a VAT audit, businesses should:

• Regularly review and audit their accounting software, internal controls, and invoicing systems to ensure compliance with VAT guidelines and laws.
• Thoroughly review VAT returns before submission.
• Conduct regular reviews of VAT returns by external consultants if prepared in-house.
• Stay updated on changes in tax laws and make necessary adjustments to their systems.

Potential Outcomes of a VAT Audit

A VAT audit can lead to various outcomes, including:

• Assessments and penalties for non-compliance or underpaid taxes.
• More thorough processes if additional issues are identified.

However, businesses that prepare well and review their returns thoroughly can significantly enhance their ability to manage an audit effectively.

Advantages of Preparing for a VAT Audit

Preparation for a VAT audit can offer several benefits:

• Minimizing resources needed to gather necessary documents once the audit begins.
• Quicker completion of the audit, avoiding deadline extensions and delays in VAT refunds.
• Identifying, rectifying, and voluntarily disclosing any errors found during preliminary document reviews.
• Potential reduction in penalties.

Conclusion

While a VAT audit can seem daunting, thorough preparation and a proactive approach can make the process smoother and more manageable. By understanding the procedures, keeping essential documents ready, and staying compliant with VAT laws, businesses can navigate VAT audits with confidence and efficiency.

Summary

VAT audits are essential for ensuring tax compliance. Conducted by the UAE’s Federal Tax Authority (FTA), these audits verify the accuracy of VAT reported, paid, and reclaimed by businesses. Here’s an overview of what VAT audits entail, when they occur, and how businesses can prepare.

Disclaimer: The Content offer general guidance and should not be considered legal, financial, or tax advice. Consult qualified professionals for personalized guidance. While efforts have been made to ensure accuracy, no guarantee is provided for completeness or applicability to individual situations. Users are responsible for their interpretation and actions based on this information, at their own risk.

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